China Is Better Able To Withstand A Trade War Than In The Past

As President Trump threatens to heap more tariffs on Chinese imports, he's got one important fact on his side: The United States remains China's biggest single export market, buying some $500 billion in goods last year alone.

But China is less dependent on the American market than it was even a decade ago and in some ways is better able to withstand a trade war than the United States.

"The question is less whether we can do harm to them than, which one can endure the pain the better? And there are some reasons to believe that over the short term, the Chinese are better positioned to manage this," says Robert Ross, a professor of political science at Boston College and an expert on U.S.-China relations.

China grew into an economic superpower by becoming a major exporter, rapidly developing a large and highly efficient manufacturing base that enabled it to sell cheap products all over the world.

"We built China," President Trump boasted during a recent appearance in South Carolina.

But China has been steadily diversifying its economy, in ways that make it less vulnerable to U.S. pressure than it once was.

"China's economy is much less dependent on trade now and on trade with the U.S. than it used to be," says Linda Lim, professor of corporate strategy and international business at the University of Michigan.

"Trade is around 20 percent of China's economy," she says. "Ten years ago, it was 40 percent."

At the same time, U.S. companies like Boeing, General Motors and Apple now make plenty of money in China's vast consumer market, giving Beijing leverage over the U.S. economy that it once lacked.

Chinese bureaucrats could make life very difficult for these companies if they chose to, Ross says.

"All these various industries can develop problems in China," he says. "There can be health hazards at a McDonald's. Starbucks could all of a sudden come under investigation for profit issues and tax issues."

To be sure, the United States can exert pain over Chinese companies, too.

But the top-down nature of its economy gives Beijing weapons that Washington lacks. Unlike Trump, Chinese leader Xi Jinping doesn't need to worry about midterms or congressional oversight when he acts.

Many Chinese companies can count on government subsidies to tide them over when things get rough and don't face the same pressure from shareholders to turn a profit every quarter, Lim says.

"If you don't have to make money, that's a huge competitive advantage. So they can absorb the cost" of a trade war, she says.

That's not to say that China is eager for a trade war or can afford to be indifferent to its consequences, says David Dollar, who was the U.S. Treasury Department's financial emissary to China during the Obama administration.

"I would say it's a serious short-term problem for the Chinese and not so big a problem in the medium to long term," Dollar says.

China's $500 billion in exports to the United States are equal to about 4 percent of its gross domestic product, and losing even half of that would be a blow. But China can gradually replace it by exporting to other countries, something it has been doing for years anyway.

In fact, a trade war would only accelerate a process already underway in China of becoming more self-sufficient economically, Lim says.

"China wants to become more independent technologically and less dependent on foreign imports of high-tech products in particular, semiconductors and the like, which it gets from the U.S. and elsewhere," she says.

"So it's perverse. You reinforce their determination to be less dependent on you," Lim says.

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